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Walsh students beat benchmarks with state-focused investment fund

Photo by JOHN SOBCZAK
Leon LaBrecque, CEO of the Troybased money management firm LJPR LLC, turned over $100,000 of his own money to students in the Walsh College Investment Club to test his theory that by investing in Michigan-based companies, you can beat market benchmarks. So far, so good.

Leon LaBrecque, CEO of LJPR LLC, a money-management firm with $636 million under management based in Troy, has put his money where his mouth is.

He'd been blogging that it makes sense, now, to invest in Michigan-based public companies. To prove the thesis, he turned over $100,000 of his own money to a team of students at Walsh College for what is dubbed the Michigan Alpha Project.

LJPR comes from the first letters of the last names of the four founders — LaBrecque, Fred Jackson, Terri Price and Brian Roehl.

The team began investing the $100,000 in January solely in companies with headquarters in the state, and so far, the thesis is correct: The fund has outperformed its benchmarks.

For the month of January, a down month for the market, the Michigan Alpha Project fund lost 2.02 percent, compared to a loss of 3.52 percent for the Standard & Poor's 500, a loss of 2.23 percent for a composite of iShares exchange-traded funds and a loss of 2.37 percent for the Bloomberg Michigan Index.

As of March 12, the alpha project was still outperforming its benchmarks. It was up by 1.39 percent, compared to 1.38 percent for the S&P 500, 0.32 percent for the Bloomberg Michigan Index and 0.99 for the iShares composite.

"I've written blogs on Michigan being a great emerging market. Companies here have beat the S&P 500 by 25 percent since 2009," said LaBrecque, who helped start Walsh's master of science in finance program in 1986 before leaving academia for the private sector. "At some point, I said, 'Let's do a Michigan-only portfolio.' "

He may also be doing two more Michigan-only portfolios. Since launching the alpha project fund, he has heard from several affluent Walsh alumni who want to invest, too, so a second account has been started for them and for a possible investment from the Walsh Foundation.

LaBrecque said he hopes to have $1 million raised from alumni and the foundation by the end of the year, to be divided into funds for two other two-student teams to manage.

LaBrecque said he has an ulterior motive, beyond making money, in starting the program. Watching students manage the fund is a great way to assess them as possible hires when they graduate, he said.

"What a great way to test the waters," said LaBrecque. He said his firm has 20 investment professionals, and two of his last three hires have been Walsh College graduates.

"Right now, a lot of Walsh graduates leave the state. This could help some of them stay here," he said.

"Thumbs up to Leon. We don't have enough investment managers in Michigan building portfolios," said David Sowerby, the portfolio manager in the Bloomfield Hills office of Loomis, Sayles & Co. "We need more investment firepower in Michigan."

Sowerby said LaBrecque's thesis has held true in recent years. The numbers vary year by year for the number of public companies in Michigan, as companies get bought or go public, but of the average of 70 companies he has followed, state companies have outpaced the S&P 500 in recent years.

Over the past 12 months, he said, Michigan stocks are up an average of 29 percent, compared to 22 percent for the S&P; over the past three years, state companies are up 50 percent, compared to 42 percent for the S&P; and over five years, they are up 229 percent, compared to 148 percent.

It is a different story over the past 10 years, primarily because of the inordinate hit that state companies took in 2007-08, during the recession. Over the past decade, state stocks are down 58 percent, compared to a gain of 64 percent for the S&P.

Would-be student teams of money managers applied to LaBrecque in November to manage the first fund, with a five-person team calling itself the Strategic InvestmentTeam Advisory Group being selected in December and starting to invest in January.

Mark Lashbrook is the portfolio manager, with Michael Manetta, Elsa Chaar, Esther Stevens and Jahnise Parks serving as analysts for various sectors.

Lashbrook is the only full-time student, getting a master's degree after spending 20 years in real estate in St. Clair County. The others have full-time jobs and go to school at night and on weekends.

The team divided the money into three buckets, with 60 percent in what it called alpha stocks, companies it would hold for a longer term; 30 percent would go into so-called beta stocks, which the team would buy and sell more frequently; 5 percent would go into the nano pool of generally small, promising high-tech companies; and 5 percent would remain in cash.

As of the investment team's first monthly meeting with LaBrecque in late February, the team had yet to invest any of that 30 percent in beta stocks.

LaBrecque and two investment professionals, James Duronio and George Bundy, held the feet of Lashbrook and his team to the fire over the slow pace of getting the money deployed.

The point of a student-run team, after all, wasn't just to give them some money to invest, it was to assess them monthly what they are doing right and what they are doing wrong. To teach them.

Having a lot of cash on hand, sitting there in a zero-interest environment nearly two months into the investment cycle, was a big no-no.

Lashbrook, who is in a joint MBA/MSF program, explained that stocks the team had identified for the beta pool had gone up in share price before it could buy them, and he was waiting until they lost some of their gains.

"I don't want to chase them," he said. "I want to wait until they come down a bit."

Duronio said that if LJBR had been given $100,000 to invest by a client and nearly two months later had $35,000 still uninvested, it would expect to be called onto the carpet.

Bundy, LJBR's business development officer, told Lashbrook and his analysts they were making the mistake a lot of investors made in 2013: They sat on the sideline, not wanting to invest in stocks that had gone up, preferring to wait until they came back down.

"And they never did come down. Those investors missed out on a yearlong run-up," he said.

LaBrecque questioned the wisdom of not investing in stocks you thought would appreciate until they lost money first.

"You think they're going to go up, but you want them to lose money first? You're trying to time the market. You need to get the money invested," he said.

But LaBrecque praised the team for the investments it had made in what was a very tough month for the market, particularly for the decision to invest in Dow, which they bought at $43.25 and was at $45.51 on Jan. 31.

The strategic investment team is under added pressure from LaBrecque, designed to mimic the real world, where customers can shift their money to other managers. He has a shadow team at Walsh that is managing an imaginary portfolio of $100,000. If its performance outpaces the SIT team's at the end of June, he said he will turn over the real portfolio to the shadow team to manage.

He said that if his thesis proves out and Michigan companies continue to outperform benchmarks, the Walsh teams could seek funding from institutional investors and municipalities.

The University of Michigan's Ross School of Business has three student-run funds, the Social Venture Fund, Zell Lurie Commercialization Fun and Wolverine Venture Fund. They take equity stakes in startup and early-stage companies and don't invest in public companies.